ESR-REIT's Q1 2022 Results Fell Short on Higher Cost of Utilities; FVE Lowered

ESR-REIT’s first-quarter 2022 results came in below our expectations with net property income, or NPI decreasing 10.4% year over year to SGD 39.5 million. This is mainly driven by higher cost of utilities at 7000 AMK that had its electricity cost tripled when its previous rate expired. As 7000 AMK caters to data center tenants, it makes up more than half of ESR-REIT’s utility cost. Moving forward, management estimates a further SGD 3 million impact on both of its third quarter 2022 and fourth quarter 2022 earnings and expects its total utility cost to make up 35% of its total operating expenses, up 10 percentage-points from last year. Excluding a one-off SGD 2.5 million distribution top up, amount available for distribution declined at a slower 6.6% year over year to SGD 26.8 million due to lower borrowing cost and contribution from ESR-REIT’s 10% interest in ESR Australia Logistics Partnership. Distribution per unit, or DPU fell at a faster 9.6% year over year to SGD 0.00723 due to an enlarged unit base from the equity fund raising exercises in May 2021 and August 2021. After updating our model to reflect a tighter NPI margin driven by the rising utility cost on both ESR-REIT’s current portfolio of assets and ARA Logos Logistics Trust, or ALOG’s Singapore properties, our estimated fiscal 2022 DPU dropped by 10.5% to SGD 0.0273, while our fair value estimate is lowered to SGD 0.46 from SGD 0.49. We think that the trust is slightly undervalued at current prices as it trades at an attractive forward dividend yield of 6.7% and we expect its merger with ALOG to drive near term growth.